Earnings Tell The Story For Elgi Rubber Company Limited (NSE:ELGIRUBCO) As Its Stock Soars 34%

The Elgi Rubber Company Limited (NSE:ELGIRUBCO) share price has done very well over the last month, posting an excellent gain of 34%. The annual gain comes to 121% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 32x, you may consider Elgi Rubber as a stock to avoid entirely with its 52x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Elgi Rubber's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Elgi Rubber

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Elgi Rubber's earnings, revenue and cash flow.

Is There Enough Growth For Elgi Rubber?

Elgi Rubber's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 22%. Even so, admirably EPS has lifted 726% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Elgi Rubber's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has got Elgi Rubber's P/E rushing to great heights as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Elgi Rubber revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Elgi Rubber (of which 2 don't sit too well with us!) you should know about.

You might be able to find a better investment than Elgi Rubber. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.